European Central Bank raises interest rate by 0.5 percentage point

European Central Bank raises interest rate by 0.5 percentage point
European Central Bank President Christine Lagarde. Credit: Belga/Pool/Daina Le Lardic

As expected, the European Central Bank (ECB) again raised its key interest rate. After two increases of 75 basis points, it is now adding another 50 basis points (0.5 percentage point), the bank announced on Thursday.

The key interest rate – the rate banks pay to borrow money from the ECB for a week – is rising to 2.5%, which is the highest level since late 2008, while the deposit rate banks get when they briefly park excess money at the ECB goes to 2%. For years, the latter rate remained negative to encourage banks to pump that money into the economy.

"Interest rates will still have to rise significantly at a steady pace to reach levels that are sufficiently restrictive to ensure a timely return of inflation to the 2% medium-term target," the ECB said in a press release.

Over time, keeping interest rates at restrictive levels will reduce inflation by dampening demand, it said. Additionally, it will also guard against the risk of a persistent upward shift in inflation expectations.

Following the news of the interest rate hike, Belfius was the first major bank to take action: it is a "confirmation that the rise in interest rates is structural in nature," a press release read.

Therefore, the bank is raising the base rate on all regulated savings accounts, from 0.01% to 0.35%. Additionally, the fidelity premium increases from 0.10% to 0.15%. The new conditions will take effect from 2 January 2023.

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